ESMA Warns Prediction Market Event Contracts May Be Banned From EU Retail Sales

The European Securities and Markets Authority (ESMA) warned that many prediction market event contracts may already be subject to a ban on sales to EU retail investors, even when firms market them as “event contracts.”

“ESMA warns that many prediction-market event contracts already face the EU's retail ban”

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ESMA said the key test is the nature of the contract, not its name, and that event contracts with binary outcomes and fixed payouts are likely to qualify as restricted financial instruments.

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ESMA said the guidance “does not introduce new rules but reiterates existing restrictions,” and it tied the analysis to whether the contracts qualify as financial instruments under MiFID II.

The regulator also said that if the contracts qualify as financial instruments, they require authorisation under the Markets in Financial Instruments Directive, MiFID II, even if retail investors are excluded.

ESMA issued the reminder after observing increased offerings of event contracts and the rapid growth of prediction markets, noting that binary options meeting the criteria of financial instruments have already been subject to country-by-country restrictions across the European Union since 2018.

ESMA stressed that firms offering trading in event contracts must determine whether specific contracts fall under restrictions on binary options for retail investors, and that contracts qualifying as financial instruments can only be distributed by registered investment firms.

In ESMA’s view, the kinds of contracts considered financial instruments include bets on interest rates, currencies, carbon emission allowances, commodity prices and derivatives linked to climate variables (weather), freight costs and inflation.

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ESMA said event contracts that are considered financial instruments are classified as derivatives and, given that these kinds of bets have binary outcomes, they fall within the restrictions on binary options — which can’t be marketed, distributed or sold to retail investors.

ESMA also warned that the same analysis must be applied to any sort of bet on financial and economic metrics regardless of whether they are called “event contracts,” and it said characterizing the payout from a binary bet as a “coupon” or a “reward” doesn’t change the contract’s classification.

The regulator added that firms must conduct a careful legal analysis of these products and their functioning to check whether they may fall within the scope of application of product intervention measures.

ESMA’s clarification arrived as offshore prediction market operators drew regulatory attention across multiple jurisdictions, with Polymarket operating from offshore markets while Kalshi and Crypto.com are regulated by the U.S. Commodity Futures Trading Commission (CFTC) in the United States.

“Excerpt from ESMA's July statement on event contracts”

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The July 3 statement said it does not introduce new legislation and instead clarified that the existing regulatory framework may already cover some prediction market products currently being marketed in Europe.

Before ESMA issued its clarification, Spain’s Ministry of Consumer Affairs temporarily blocked Kalshi and Polymarket on May 26 after determining that the platforms did not hold the gambling licenses required under Spanish law.

A few weeks later, gambling regulators from nine European countries, including Belgium, France, Germany and Spain, issued a joint statement warning consumers about unlicensed gambling websites operating across Europe ahead of the FIFA World Cup.

In the United States, the CoinDesk report said Polymarket is seeking CFTC approval to reopen its main platform to American traders, and it noted that the CFTC must decide on the matter in a process aided by four vacant seats.